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Private Mini-Grid Firms Deserve a Chance to

Compete Against Slow Utilities in Africa


A faster path to rural electrification.

by Gabriel Davies, Matt Tilleard and Lucy Shaw


September 05, 2018

Widespread electrification was one of the great achievements of the 20th century. It is a miracle of human
progress that 87 percent of the global population, 6.5 billion people, now has access to electricity.

Progress toward universal electrification has been complex, yet across decades and geographies, research
clearly shows a common thread: reliance on a combination of government subsidy and granting
monopolies to state-owned utilities.

This well-established model is not working in sub-Saharan Africa. While we continue to make progress on
other continents, the absolute number of people without electricity in Africa — 600 million — has
remained static in the last few years.

It doesn’t have to be so, and new insights point to two ways to accelerate progress towards rural
electrification in Africa.

First, as we have previously established, we know we can electrify Africa faster through the deployment of
new and cost-effective technology. For instance, rather than building centralized grid infrastructure to
reach remote communities, decentralized mini-grids combining solar and battery storage technology are
now the least-cost option to connect at least 100 million Africans today, and many more within the next
decade.

Second, and more controversially, we believe that electrification could be accelerated by greater
involvement from the private sector.

The traditional model for rural electrification has been to fund public utilities to carry out large-scale rural
connection programs.

However, in Africa, these public programs are generally expensive and slow. World Bank-funded programs
from 2000-2014 averaged $4,000 per connection in low-access countries (80 percent of which are African).
This is high considering the anticipated payback time and extant alternatives with lower cost of connection.
The median length of World Bank electricity projects is nine years, which includes two years of delay.

Moreover, once public utilities connect rural consumers, they are not able to provide a high level of power
quality and customer service. This limits customers from realizing the full benefits of electricity — to power
appliances that improve their quality of life and grow their businesses. This is borne out by the low
revenues that public utilities receive from their rural customers.

Recently, Kenya Power and Lighting Corporation revealed that 55 percent of all customers, who are largely
concentrated in rural areas, spend less than $3 a month on electricity. Even at higher levels of
consumption, University of Massachusetts Amherst Assistant Professor Jay Taneja’s analysis of KPLC data
has shown the payback period on a typical KPLC rural connection is over 44 years.

The reality is that every time African utilities connect a rural customer, they lose more money. This is part
of the reason that 80 percent of African utilities made losses in 2014. Each additional unprofitable
customer decreases the viability of state-owned national utilities.

It is time to scale new models for rural electrification. We should give private companies a legitimate
chance to serve hard-to-reach customers with mini-grids. If successful at scale, this could provide a more
affordable and faster path to full electrification. It would also allow public utilities to focus on providing
centralized grid connections to the urban and industrial customers they can cost-effectively serve.

Why do we believe that private utilities may be able to accelerate rural electrification? Put simply, higher
reliability, better customer support for powering local businesses and lower cost.

Reliability
Private-sector mini-grids have delivered higher levels of reliability to customers. Companies such as
PowerGen Renewable Energy offer 98 percent up-time to customers, far higher than observed reliability in
Dar es Salaam and Nairobi, where power was within the standard usable voltage range for only 47 percent
of the time.

It is too early to make sweeping statements about the reliability of private-sector-delivered connections.
But, in our work, we continue to see mounting evidence that the private sector has the incentive and
ability to consistently deliver more reliable connections.

Customer support
Customer service also differentiates private from public providers. Ultimately it’s this support that bridges
the gap between providing the infrastructure of electrification, to supporting the energy services that drive
rural economic development. For example, when connecting a new customer, private mini-grid operators
carry out the in-home wiring themselves to ensure a connection actually translates into plug sockets and
lights.

Many private mini-grid developers in East Africa such as PowerGen, PowerCorner (Engie), RVE.SOL and
PowerHive have also launched appliance financing programs, widening their focus to selling customers the
services that electricity provides, not just selling kilowatt-hours. By selling TVs, freezers, hair clippers,
laptops, machine tools and grain mills to their customers on monthly pay plans, the upfront cost is broken
down into affordable chunks.

Private utilities also typically hire community staff to provide on-site support to customers, including local
technicians and sales agents, supported by a call center at company headquarters. In contrast, public
utilities are not sufficiently motivated to provide this kind of close customer support to their rural
customers and are required to charge relatively high connection fees. Rural electrification should be more
than just dropping a power line into someone’s house. It should be about providing reliable, quality power
that people can build their lives and livelihoods around.

Cost
The private sector can help lower the costs of rural electrification. Private sector mini-grids can provide
power at $500 to $1,000 per connection, by optimizing system design for rural customer demand, and
integrating the latest technological developments from cheaper and better batteries to the use of remote
monitoring and servicing.

Data on costs is still scarce, but a recent benchmarking report by the World Bank’s Energy Sector
Management Assistance Program found that “mini-grids developed and operated under private utility
service schemes have relatively lower capex per kilowatt, throughout the whole capacity range spectrum."
And on a per-connection basis, the average cost for public utility-managed mini-grids in Africa was $2,039,
more than twice what we see for private-sector-managed mini-grids.

So, early evidence suggests that allowing private mini-grid utilities could provide a more affordable and
more effective path to rural electrification. It’s important to note that we aren’t arguing that this has been
proven at scale. Our argument is that African governments should allow this thesis to be tested.

Encouragingly, Africa’s largest economy, Nigeria, is doing exactly that. Nigeria recently introduced mini-grid
regulations that will provide an opportunity to test the potential of this solution. The regulation contains
three of the four policies that are critical to scaling private sector mini-grids: 1) a streamlined permitting
process; 2) the ability to charge cost-reflective tariffs; 3) clear compensation mechanisms for mini-grids to
integrate with the main grid; and 4) subsidy parity with the public utilities for providing rural connections is
being provided by a $150 million World Bank program that supports the private sector to connect rural
households and businesses to mini-grids.

We know that mini-grid technology provides a new opportunity to accelerate rural electrification in Africa.
And we believe that it is worth testing if private utilities, when scaled, can accelerate it further by
implementing mini-grids with higher reliability, better customer service and lower cost. The countries that
will unlock this opportunity first are those that implement the four policies already in action in Nigeria. The
private sector deserves a chance to bring power to rural Africa where others continue to fail, despite
decades of trying.

***

Gabriel Davies, Matt Tilleard and Lucy Shaw work on energy access at CrossBoundary, a mission-driven
investment firm that unlocks capital to make a positive difference in developing economies. The
CrossBoundary Group has over 50 investment professionals spread across offices in Bamako, Johannesburg,
Lagos, Nairobi, New York City and Washington, D.C